Professional Documents
Culture Documents
in Pakistan
The Role of Governance, National Security
and Global Investment Trends
Sakina Lavingia
Private sector investment has become one of the most essential sources of international
capital flows to developing countries. Foreign Direct Investment (FDI) as one type of
private sector investment has the potential to drive economic growth and development.
Understanding the factors that motivate or deter foreign investors from investing in a
developing country therefore is crucial. This thesis examines the particular case of
Pakistan and analyzes internal and external factors that have affected the inclines and
declines in inflows of FDI to the country between 2000 and 2014. By performing a
comparative sectoral analysis, this thesis examines the effects of government efficacy,
national security, and global levels of FDI inflows on FDI inflows on three distinct
governance and limited security provision within the country has increased the perceived
levels of risk and uncertainty associated with investing in Pakistan. This has resulted in a
3
Acknowledgements
I would like to thank Professor Eve Sandberg, for her guidance and support throughout
this process, and for all that she has taught me during my time at Oberlin as a researcher
and writer.
I am truly grateful to Professor Kristina Mani and Professor Bijetri Bose for agreeing to
serve as my second and third readers, and to Professor Chris Howell for leading our
Honors Seminar. Their advice and directive has been incredibly valuable throughout this
year.
I am so lucky to have had an amazing group of peers in the Honors seminar this year.
Without them, this process would most definitely not have been as fulfilling.
I would like to express my gratitude to Joel Whitaker, Majid Munir, Taimour Noorani,
Shaista Khilji, Fawzia Naqvi, Chris Canavan and Pratima Singh for taking out the time to
share their thoughts and suggestions with regards to my thesis. Their opinions have added
a unique perspective that I would have been unable to access elsewhere.
I would like to thank Oberlin for the four years I have spent here, learning, questioning,
and growing. I am so grateful to have found a home away from home, filled with people
that I love and respect.
Last, I would like to thank my parents, without whom I would not be where I am today. I
am so blessed to have their love, support and prayers guide me through my everyday.
4
5
Table of Contents
Chapter One
Introduction ................................................................................... 12
Chapter Two
Advancing the Global Partnership ................................................ 23
Chapter Three
Foreign Direct Investment in Developing Countries .................... 33
Chapter Four
Power and Energy ......................................................................... 50
Chapter Five
Telecommunications ..................................................................... 64
Chapter Six
Financial Services ......................................................................... 77
Chapter Seven
Conclusion .................................................................................... 89
References ..................................................................................... 94
6
7
List of Graphs
Figure 1a FDI Inflows across continents, 2000 – 2014
Figure 1b FDI Inflows across Asia, 2000 – 2014
Figure 2 Net Inflows of Foreign direct Investment as a % of
GDP, 1970 – 2013
Figure 3 Inflows of Foreign Direct Investment Inflows to
Pakistan, 2001 – 2013
Figure 4 Differences in Inflows of FDI to Pakistan Across
Sectors between 2000 and 2015
Figure 5 Correlation between Government Efficacy and FDI
Inflows to Pakistan’s Energy Sector
Figure 6 Correlation between Security and FDI Inflows to
Pakistan’s Energy Sector
Figure 7 Correlation between Global Inflows of FDI and FDI
Inflows to Pakistan’s Energy Sector
Figure 8 Teledensity in Pakistan 2002 – 2014
Figure 9 Correlation between Government Effectiveness and
FDI Inflows to Pakistan’s Telecommunication Sector
Figure 10 Correlation between Security and FDI Inflows to
Pakistan’s Telecommunication Sector
Figure 11 Correlation between Security and FDI Inflows to
Pakistan’s Telecommunication Sector
Figure 12 Correlation between Government Effectiveness of FDI
and FDI Inflows to Pakistan’s Financial Services Sector
Figure 13 Correlation between Security and FDI Inflows to
Pakistan’s Financial Services Sector
Figure 14a Correlation between Global Inflows of FDI and FDI
Inflows to Pakistan
Figure 14b Correlation between Global Inflows of FDI and FDI
Inflows to Pakistan’s Financial Services Sector
8
List of Abbreviations
BOI Board of Investment
CPEC China-Pakistan Economic Corridor
FATA Federally Administered Tribal Areas
FDI Foreign Direct Investment
GDP Gross Domestic Product
GoP Government of Pakistan
IMF International Monetary Fund
IPP Independent Power Producers
KESC Karachi Electric Supply Culture
KP Khyber Pakhtunkhwa
MDG Millennium Development Goals
NEPRA National Electric Power Regulatory Authority
PAEC Pakistan Atomic Agency Commission
PML-N Pakistan Muslim League (Nawaz)
PML-Q Pakistan Muslim League (Quaid-e-Azam Group)
PPIB Private Power and Infrastructure Board
PPP Pakistan Peoples Party
PTA Pakistan Telecommunication Authority
PTC Pakistan Telecommunication Corporation
SAP Structural Adjustment Program
SBP State Bank of Pakistan
TPP Tehrik-e-Taliban Pakistan
UNCTAD United Nations Conference on Trade and Development
WAPDA Water and Power Development Authority
9
10
11
Chapter One
Introduction
The field of international development has evolved significantly since World War
II, when it first emerged as a formal area of study. Priorities within the international
development agenda have shifted from stimulating economic growth to identifying ways
a culmination of the shifts that have occurred over the last seven decades, and relies upon
the ability of a diverse range of actors and stakeholders to participate in what has been
termed, a “global partnership.”1 As it becomes critical to look beyond aid and integrate
all forms of international initiatives capable of affecting development results, the role of
the private sector is particularly important.2 James Michel, Senior Advisor at the Center
for Strategic International Studies argues that, “to the extent that private investment
creates jobs and helps lift people out of poverty and into the formal economy, there can
Over the last decade private sector investment has become one of the most
component of private sector financing, the growth of Foreign Direct Investment (FDI)
1
Michel, James. 2016. Beyond Aid: The Integration of Sustainable Development in a Coherent International Agenda.
Center for Strategic and International Studies. P. iv, 1. Accessed February 2016.
http://csis.org/files/publication/160111_Michel_BeyondAid_Web.pdf
2
Ibid, p. iv
3
Ibid, p. vii
4
Ibid, p. 31
12
inflows to developing countries provides evidence of the private sector’s increased
capacity to contribute to the development agenda. The Organization for Economic Co-
Unlike international aid, higher levels of FDI suggest greater investor confidence
competitive rates of return while accounting for risk and uncertainty. Governments of
developing countries have come to rely on FDI as a critical source of external finance due
to its ability to assist in human capital formation and create a pool of resources that
and greater openness to trade, FDI can provide developing countries with increased
Given that foreign direct investment has the potential to promote a country’s
economic growth, it is critical for us to understand the factors that motivate or deter
foreign investors from investing in a given developing country. This thesis explores the
particular case of Pakistan, and analyzes internal and external factors affecting FDI
inflows to the country between 2000 and 2014. The time period chosen in this study
encapsulates the sharpest incline and decline of FDI inflows within Pakistan.
5
OECD Data: Foreign Direct Investment. Accessed January 2015. https://data.oecd.org/fdi/fdi-flows.htm
13
Like its regional and economic counterparts, Pakistan experienced a substantial
increase in FDI inflows between 2000 and 2007. This trend suddenly ceased and then
reversed following the global financial crash of 2008, when most regional developing
countries experienced sharp declines in inflows of FDI. However, while nearly all of
until 2013, the first year that a modest rate of growth was recorded since 2007.
important case to study. Pakistani economists such as Muhammad Arshad Khan and
Nayyra Zeb have attributed lower levels of FDI inflows to Pakistan on limited political
banks such as Santander’s and KMPG have echoed these concerns alongside issues that
property rights.7 Each of the factors is reflective of the Pakistani government’s limited
To understand and explain the Pakistani experience, this study analyzes the
effects of internal and external shifts that have influenced Pakistan’s capacity to attract
inflows of FDI. In particular, this paper examines the effects of government efficacy,
national security, and global investment trends, on domestic FDI inflows to Pakistan
6
Arshad Khan, Muhammad and Ali Khan, Shujaat. Foreign Direct Investment and Economic Growth in Pakistan: A
Sectoral Analysis. Pakistan Institute of Development Economics. 2011. Accessed October 2015.
http://pide.org.pk/pdr/index.php/wp/article/viewFile/2968/2917
Foreign Direct Investment and Economic Growth in Pakistan: A Sectoral Analysis; Zeb, Nayyra et al. Role of Foreign
Direct Investment in Economic Growth of Pakistan. International Journal of Economics and Finance 6, no. 1 (2014): 32
– 38.
7
Santander Trade Portal. Pakistan: Foreign Investment. Accessed September 2015.
https://en.santandertrade.com/establish-overseas/pakistan/investing
14
Governance Indicators, captures the quality of civil service institutions, policy
represents the total amount of global FDI inflows in any given year. Each of these factors
reflects the extent to which Pakistan has been able to provide an investment climate that
This paper argues that the instatement of a fragile democratic government and
rapidly deteriorating domestic security situation increased the perceived levels of risk and
considered by foreign investors at this time due to the weakened international financial
climate that had reduced total global investment levels. The simultaneous deterioration in
Recognizing that the effects of a decline in FDI was not felt equally across the
Pakistani economy, this paper undertakes a comparative sectoral analysis of FDI inflows
within Pakistan, analyzing the ways in which government effectiveness, security, and
global investment levels have affected Pakistan’s FDI inflows nationally and across
sectors. The sectors analyzed in this study are Energy, Telecommunications, and
8
World Governance Indicators 2015. Accessed December 2016.
http://info.worldbank.org/governance/wgi/index.aspx#doc
9
Global Terrorism Index. 2015. Accessed January 2016. http://economicsandpeace.org/wp-
content/uploads/2015/11/Global-Terrorism-Index-2015.pdf
15
Financial Services. By examining the effects of the three selected explanatory variables
on each of the three sectors, this paper discusses the conditions limiting the provision of
an environment that promotes the inflow of FDI to Pakistan. Analyzing differences in the
FDI across sectors, this paper concludes by discussing ways the Pakistani government
can then intervene on a national and sectoral level to create an environment that is
2000s. Faltering briefly in 2009, FDI inflows to developing economies increased to US$
681.4 billion in 2014, representing a share of 54% of global FDI inflows.10 This growth
emerges at a time when FDI inflows to the developed world have been declining,
Figure 1a: FDI Inflows Across Continents, 2000 – Figure 1b: FDI Inflows across Asia, 2000 – 2014
2014 Source: UNCTAD World Investment Report 2015,
Source: UNCTAD World Investment Report 2015, Data Compiled by Author
Data Compiled by Author
10
United Nations Conference on Trade and Development. World Investment Report 2015. Accessed January 2016.
http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf
16
As observed in Figure 1a, Asia has received increasing attention as a lucrative
destination for FDI inflows within the developing world. Since the early 1990’s, several
Asian emerging market economies have worked towards reforming and liberalizing their
trade regimes, opening their markets to foreign investment. However, the impact of trade
liberalization on FDI inflows within Asian economies has varied across countries. Figure
1b indicates that FDI inflows to East Asia have remained the highest between 2000 and
2014, followed by South East Asia. Inflows of FDI to West Asia have been in decline
since 2008. FDI inflows to South Asia increased steadily until 2008, after which they
have been unable to record significant rates of growth. However, the slight upward trend
in FDI inflows to South Asia observed in 2013 hints at the possibility of growing foreign
Asian economies listed on the MSCI Emerging Market Index in 2002 maintained
fairly similar rates of growth in FDI inflows until the global financial crash of 2008. 11
Following the crash, emerging markets listed on the MSCI Emerging Market Index
experienced a sharp decline in FDI inflows. All but Pakistan, however, were able to
recover growth in FDI inflows within the next three years. The inability of Pakistan’s
economy to perform at a rate similar to other Asian emerging markets within the
international economy resulted in its demotion from Emerging Market status to Frontier
Market status in 2012. Pakistan was the only Emerging Asian Market to be demoted in
the 2012 rankings. Given that all emerging Asian economies barring Pakistan were able
to recover from the external shock of the financial crash in 2008 suggests that external
11
The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to
measure equity market performance in global emerging markets.
Emerging markets refer to developing countries that are experiencing rapid growth and industrialization. Frontier
markets refer to nations that are at an earlier stage of economic development as compared to emerging markets.
Asian Emerging Markets in 2002 were China, India, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Thailand
and Taiwan. Sri Lanka was demoted to a frontier market in the index’s 2007 ranking.
17
limitations were not the sole reason for Pakistan’s inability to regain growth in FDI
inflows. Rather, internal changes specific to Pakistan were preventing a full recovery in
growth rates of FDI inflows to the country. Examining trends in FDI inflows across three
security and governance deficits have rendered Pakistan a risky investment destination,
and dampened the nation’s capacity to attract and maintain foreign direct investment at
While FDI has played a critical role in the development of the Pakistani economy
over the last fifteen years, its effects have been varied across sectors. By applying a
comparative sector analysis approach, this paper analyzes disaggregated units of the
Pakistani economy, and examines the relationship between sectoral FDI inflows and three
18
The sectors analyzed in this study are energy, telecommunications, and financial
services. The motivation behind choosing these sectors was threefold: First, the three
sectors have on average been the largest recipients of FDI since 2000. Second, the three
Telecommunications and Energy sectors are developing resources that can promote
investment in other areas of the economy such as manufacturing. The provision of such
foreign investor confidence in the country. Third, public ownership of companies within
privately owned, while energy is mostly owned or managed by the government. Financial
services falls in the middle of the spectrum in terms of public ownership and government
terms of industry type and extent of government involvement, this study provides a
unique perspective on the ways in which the effects of security, government efficacy and
This study utilizes a variety of quantitative and qualitative data sources to analyze
the effects of each of the independent variables on FDI inflows within Pakistan. For each
of the three sectors, this paper measures the effects of government effectiveness, security,
and global inflows of FDI on national and sectoral inflows of FDI between 2000 and
19
2014. However, the paper is unable to analyze the effects of the independent variables on
Data sources used in this study are: 1) Global Terrorism Index 12 to measure
political stability, 3) UNCTAD’s World Investment Reports14 for data on global and
national inflows of FDI between 2000 and 2014, and 4) Pakistan’s Board of Investment15
12
Produced by the Institute for Economics and Peace, the GTI is based on data from the Global Terrorism Database
(GTD), which is collected and collated by the National Consortium for the Study of Terrorism and Responses to
Terrorism. Source: http://economicsandpeace.org/wp-content/uploads/2015/11/Global-Terrorism-Index-2015.pdf
13
The World Governance Indicators report aggregate and individual governance indicators for 215 economies across
six dimensions of governance: Voice and Accountability, Political Stability and Absence of Violence, Government
Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption. These indicators combine the views of a
large number of enterprise, citizen and expert survey respondents, and are based on over 30 individual data sources
produced by a variety of survey institutes, think tanks, non-governmental organizations, international organizations,
and private sector firms.
Source: http://info.worldbank.org/governance/wgi/index.aspx#home
14
United Nations Conference on Trade and Development. World Investment Report 2015
15
Pakistan Board of Investment. http://boi.gov.pk/foreigninvestmentinpakistan.aspx; Asian Development Bank, Private
Sector Assessment: Pakistan. Page 9. Accessed January 2016. http://www.adb.org/sites/default/files/institutional-
document/32216/private-sector-assessment.pdf
20
Country reports, market analyses, and investment risk reports published by
also utilized in this study. These include reports by the Economist Intelligence Unit,
Standard and Poor’s, International Finance Corporation, Arif Habib Bank, KPMG, and
the World Bank. Qualitative information specific to each sector was primarily accessed
from annual reports published by national regulatory authorities: National Electric Power
Interviews with researchers and practitioners working within the field of development
economics, or each of the individual sectors, were also conducted. These interviews
provided first-hand opinions of investors and development economists who are assessing
the risks and benefits deterring or encouraging the decision to invest in Pakistan.
The chapters of this paper are as follows: Chapter Two discusses the role of the
private sector in promoting economic growth within developing countries. The Chapter
provides a brief overview of the evolution of development models from the 1950’s till
present day, and discusses the growing importance of the private sector and foreign direct
investment within the global development agenda. Chapter Three argues the importance
of Pakistan as an important case in the study of FDI inflows to developing countries. The
chapter begins by presenting an historical analysis of FDI inflows to Pakistan since the
1970s, when the country began to move away from a policy of nationalization towards
21
present day opportunities available to investors within the country, followed by an
overview of governance and security conditions within the country that have influenced
domestic conditions and increased the level of risk associated with investing in Pakistan
since 2000 until 2014. The chapter concludes with a comparative discussion of FDI
inflows across Energy, Telecommunications, and Financial Services. Chapter Four, Five,
and Six analyze the effects of government effectiveness, national security, and global
chapters offer a comparative sectoral analysis of the internal and external factors
affecting FDI within Pakistan, and the ways in which the factors differently affect each of
the sectors before and after the financial crash of 2008. Chapter Seven discusses steps the
Pakistani government can take in order to provide a more stable investment climate
22
Chapter Two
Advancing the Global Partnership
Importance of Private Sector Involvement in Economic Development
there has been a steady push towards the diversification of development financing. James
Michel argues that the role of aid as the primary source of funding is quickly changing in
many developing countries as alternative sources and strategies for financing become
more prominent and popular. 16 In 2015, the Investment to End Poverty Report by
countries. Approximately USD 163 billion was disbursed in Official Development Aid
(ODA), while international investment flows stood at USD 1.88 trillion in 2013.17 Private
domestic and international investment flows in low and middle income countries have
more than tripled over the last decade, accounting for over half of the financial resources
16
Michel, James. P. 26.
17
In the same year, commercial domestic spending was USD 2.2 trillion. Michel, James. P. viii.
18
European Commission. A Stronger Role of the Private Sector in Achieving Inclusive and Sustainable Growth in
Developing Countries. Brussels, 2014. Page 11.
19
Michel, James. P. 26
23
This chapter studies the role and influence of one actor—the private sector—
within the emerging global partnership. Given the private sector’s growing involvement
expanding capital stock, it is important to understand the role it has played historically
and continues to play currently within the international development agenda. This chapter
begins by presenting a brief history of the evolution of the field of development, followed
role of the private sector within the present day agenda, and concludes by discussing the
almost entirely on economic growth and advocated for massive injections of capital as
the means of achieving rapid increases in gross domestic product (GDP). According to
Syed Nawab Haider Naqvi, a noted Pakistani economist, the 1950’s – 1980’s marked the
“achieving high rates of economic and human development in the post-colonial periods,
with a view to reducing poverty and achieving convergence with the developed
countries.”21 Agriculture was regarded as the leading sector in the process of growth
creation. It was argued that gains within the agricultural sector would result in a
20
Naqvi, Syed Nawab Haider. 2010. The Evolution of Development Policy: A Reinterpretation. Karachi; New York:
Oxford University Press. Page 6.
21
Ibid, p. 43
24
manufacturing and services.22 Mechanisms instituted for achieving this process included
increasing the share of manufacturing activities within the economy along with
By the end of the 1970’s and early 1980’s the Traditionalist model gave away to
the emerging Liberalist paradigm. Liberalists argued that high growth rates observed in
the post-colonial and post-WW2 era were artificially stimulated through extensive and
Growth theorists—such as Paul Romer and Robert Lucas shifted the focus of the
development agenda away from labor and capital restructuring. Instead, free market
policies, that aggressively attempted to minimize the role of the government within the
development process were prioritized. These policies were contained in the Washington
Consensus: a set of ten strategies that the United States government and international
financial institutions believed were necessary elements of “first stage policy reform,” that
(SAPs) of the International Monetary Fund (IMF) and World Bank. SAPs radically
altered the government-led development framework that had been established within the
oriented. The Programs included policies requiring internal changes such as privatization
and deregulation, and external changes such as the reduction of trade barriers. In many
ways, the emergence of the Liberalist paradigm represented the beginning of the formal
22
Dang, Giang, Low Sui Pheng, and Ohio Library and Information Network. 2014; 2015. Infrastructure Investments in
Developing Economies: The Case of Vietnam. Singapore; 4: Springer. Page 16.
23
Naqvi, Syed Nawab Haider. The Evolution of Development Policy: A Reinterpretation P. 6
24
Ibid, P. 7
25
Glossary. World Health Organization. Accessed April 2016. http://www.who.int/trade/glossary/story094/en/
25
involvement of the private sector as an independent and influential actor within the field
of international development.
economists that argued against the framework’s inattention to the importance of good
international aid transfers as the primary source of funding. 26 Critics claimed that free
argues that the pursuit of liberalist policies would result in the emergence of a
“Development State.”27 The development state, she writes, are states that are, “materially
and ideologically sustained through development relations. Such states are largely
dependent on aid transfers to meet recurrent budgets.”28 The development state is fiscally
this financing. By extension, the development state is required to follow the strategies
reintroduced the need to prioritize more than just the expansion of the free-market,
resulting in the emergence of the Human Development Model in the mid-1990s. The
model directed attention away from prioritizing market friendly approaches towards
26
Dang and Pheng, P. 19
27
Green, Maia. 2014. The development state: aid, culture & civil society in Tanzania. Woodbridge, Suffolk. Page 15.
Maia Green is a Professor of Social Anthropology at the University of Manchester
28
Ibid.
26
market—and by extension the private sector—was still important, the Human
Development Model did not consider it to be the sole or primary route through which
development could be pursued. David Booth presents the argument that weak or
development, alongside the development of the private sector. The model in many ways,
serves as an initial introduction to what has since been termed the global partnership.
The Human Development Model forms the basis of the present day development
agenda. The next section of this chapter discusses the design of the Millennium
Development Goals introduced in the early 2000’s, and the subsequent construction of
the Post-2015 Development Agenda. The Millennium Development Goals and the Post-
2015 Development Agenda encapsulate and expand ideas presented in the Human
From 2000 until 2015, the United Nations’ Millennium Development Goals
(MDGs) served as the primary development model. The MDGs focus on core issue areas
such as poverty alleviation, gender equality, education, health, sustainability, and female
29
Booth, David. 2011. Can aid become more relevant to ‘getting things done’? World Bank. Accessed February 2016.
http://blogs.worldbank.org/governance/can-aid-become-more-relevant-to-getting-things-done
27
equality. While Traditionalist and Liberalist theorists differed on the basis of whether
government or markets should be the primary actor guiding the development process, the
MDGs advocated for synthesizing of the two positions, focusing instead on the creation
of a global partnership. This partnership would incorporate a diverse range of actors and
the development process. Such a strategy emerged from a recognition of the challenges
associated with achieving any of the listed MDGs. The consensus was that a partnership
was necessary in order to successfully meet the targets set out in the MDGs. In particular,
the MDGs focused on the importance of developing a strong relationship between the
private sector and domestic governments. The role of the private sector as a provider of
financing and capital in developing countries where governments had limited resources
was particularly important. Given that investment decisions made by the private sector
between foreign companies and domestic governments allows for a clearer understanding
of the opportunity set existent within a specific country. Further, such a partnership
understands the necessity of including and supporting domestic governments within the
development agenda, a consideration that was not forgotten within the MDGs.
In 2014 the European Commission released a report advocating for a stronger role
countries.30 The Commission argued that by increasing investment and playing a more
active role in the development process the private sector could send a “powerful signal
about the important role it can play in contributing to inclusive and sustainable growth in
30
European Commission, p. 16.
28
developing countries.”31 Given the diversity of the private sector in terms of capacity,
opportunity and approach, it is able to operate at different levels and regions of the
vision established by the MDGs through global partnership. The agenda relies on two
foundational pillars: (1) a commitment to human wellbeing, security and dignity as was
laid out in the Human Development Model of development, and (2) a commitment to
sustainable development.32 James Michel has argued that the, “successful implementation
of the new agenda will require that international cooperation proceed in new ways that
transcend the traditional aid-centered paradigm.”33 He identifies the growing need to “do
systems.34 The new agenda demands that we look beyond aid as the primary source of
role and actively taking advantage of the foreign private sector within the global
of resources that can drive investment and economic growth within developing countries.
31
Ibid.
32
Michel, James. P. vi
33
Ibid, P. 70.
34
Ibid.
29
2.4 Foreign Direct Investment as a Driver of Economic Growth
FDI has become one of the most important sources of international capital flows
FDI is considered to be the largest source of capital formation in the world and is often
argues that most developing countries rely primarily on FDI as a source of external
finance because FDI is able to stimulate greater economic growth relative to other
sources of capital inflows. 36 Modernization theories suggest that FDI can promote
economic growth under the principle that growth requires high levels of investment.37
Through capital accumulation, FDI is able to introduce new forms of technology into the
production function of the domestic economy.38 Growth theories emphasize the effect of
for skill acquisition and the development of human capital. FDI is important for filling
the gap between domestic savings and the desired level of investment in developing
During the last decade, several developing countries have recognized that
35
Zeb, Nayyra et al. Role of Foreign Direct Investment in Economic Growth of Pakistan.
36
Arshad Khan, Muhammad and Ali Khan, Shujaat, Foreign Direct Investment in Pakistan: The Role of International
Political Relations.
37
Zeb, Nayyra et al. Role of Foreign Direct Investment in Economic Growth of Pakistan.
38
Toulaboe, Dosse et al. Foreign Direct Investment and Economic Growth in Developing Countries. Southwestern
Economic Review 36, no. 1(2013): 155 – 170. Page 158.
30
attempt to encourage FDI inflows many low-income countries have worked towards
removing trade restrictions, adopting liberal, market-oriented reforms that favor the
interests of foreign investors.39 According to the United Nations Conference on Trade and
FDI inflows grew from approximately 33% in 2006 to 54% in 2013. 40 However, while
reforms have increased FDI inflows to the developing world, concerns regarding negative
domestic and international externalities have not been lost. Dependency theories for
instance suggest that reliance on foreign investment by low-income economies may result
crucial for domestic policies instituted by the host country to establish an interaction
Ultimately however, the effects of FDI on investment and economic growth are
specific to a country. Distinct domestic political and economic circumstances mean that
empirical studies are unable to provide conclusive cross-country results regarding the true
growth are invariably tied to the capacity of the foreign private sector to collaborate with
sector involvement is only one aspect of the Post-2015 development agenda. The goal of
this paper is not to determine whether the inclusion of the private sector within the
39
Ibid, P. 157.
40
World Investment Report, 2015.
41
Arshad Khan, Muhammad and Ali Khan, Shujaat. Foreign Direct Investment in Pakistan: The Role of International
Political Relations. P. 2
31
development agenda is inherently beneficial or not. Rather, given international trends
regarding the growth of FDI in developing countries, this paper recognizes the
importance of studying the role of the private sector as a driver of economic growth and a
The next chapter discusses historical trends of FDI inflows within Pakistan. It
examines policies that have been implemented since the 1970’s to attract FDI, and
discusses the present day opportunity set for foreign investors interested in investing in
Pakistan. The final section of the chapter provides an overview of events that have
occurred within Pakistan since 2000 that have affected its investment climate.
32
Chapter Three
Foreign Direct Investment in Developing Countries
Pakistan as an Important Case Study
Pakistan’s foreign investment regime is one of the most liberal and attractive in
South Asia. The government of Pakistan offers foreign investors 100% project ownership
in a vast number of sectors and allows the remittance of capital, profits and dividends
without any regulatory approvals.42 Yet FDI inflows to Pakistan lag behind the nation’s
regional or economic counterparts. The goal of this chapter is to discuss the evolution of
Pakistan’s policies for attracting FDI, and to examine events occurring between 2000 and
2014 that affected government effectiveness and national security levels in Pakistan, and
altered global investment trends internationally. The first section of this chapter provides
an historical overview of FDI inflows to Pakistan from the 1970’s until today. The next
domestically and within the international economy, and discusses the ways in which
changes in government efficacy, security, and global investment trends affected national
FDI inflows. The chapter concludes with a comparison of FDI inflows between the three
sectors analyzed in this paper namely energy, telecommunications, and financial services.
42
Asian Development Bank, Private Sector Assessment: Pakistan. Page iii.
33
3.1: Foreign Direct Investment in Pakistan: A Historical Analysis
(1970’s – Present)
Prior to the late 1970’s, Pakistan’s trade and investment policies vacillated
between import substitutions and export promotion. Nationalization under the Zulfiqar
Ali Bhutto regime in the early 1970’s made the government the largest player in the
economy. While foreign investments were not nationalized, an increased focus on the
the mid-1970’s. The Foreign Private Investment Act of 1976 marked the beginning of the
foreign investors. The Act of 1976 guaranteed the remittance of profit and capital, and
introduced policies that avoided double taxation, lowering initial costs of investment for
foreign parties.44
In 1984 an industrial policy statement that gave equal weight to the public and
private sectors was announced. The policy encouraged foreign investment in the form of
joint equity participation with local areas, thereby establishing a business climate that
was more favorable for foreign investors. As Figure 2 indicates, the mid-1980’s mark the
beginning of a fairly sustained increase in FDI inflows to Pakistan until 2008. FDI
43
Arshad Khan, Muhammad. Foreign Direct Investment in Pakistan: The Role of International Political Relations.
Working Paper Series, University of Oxford Department of International Development. Page 9
44
Ibid, p. 10
34
Figure 2: Net Inflows of Foreign Direct Investment as a % of GDP, 1970 – 2013
Source: World Bank
During the 1980’s and 1990’s, the Government of Pakistan initiated several
market-based reforms liberalizing the trade and investment regime by introducing various
trade and fiscal incentives to foreign investors. These provisions included increased tax
concessions, credit facilities, tariff reduction, and the easing of foreign exchange
controls.45 Remnants of restrictions on capital inflows and outflows that had been placed
allowed to hold 100% of the equity of their industrial project and remittance of dividends
and disinvestment proceeds were permissible without any prior permission of the State
helped generate opportunities for FDI within Pakistan and provide investment services to
interested foreign investors. These initiatives placed Pakistan on the International Finance
Corporation’s list of emerging South Asian stock markets in 1992, along with India,
Indonesia, Malaysia, and Thailand. The country was also ranked an emerging market by
45
Arshad Khan, Muhammad. Foreign Direct Investment and Economic Growth: The Role of Domestic Financial
Sector. Pakistan Institute of Development Economics Working Paper Series, 2007.
46
Ibid, p. 16
35
MSCI in 1997, a placement that reflected upon development within the economy,
international investors.47
By 1997 the Government had announced the New Investment Policy that aimed to
The push towards developing the manufacturing sector and advancing overall levels of
infrastructure within the country was central to this new policy, and allowed foreign
investors to capitalize on opportunities within sectors that had initially been closed to
them. The policy provided various tariff and tax incentives and continued to protect the
foreign investors’ rights to remit royalties, technical fees, capital, profit and dividends.
Economic Crisis and a fragile democratic government meant that the introduction of the
policy was unable to produce much growth in FDI inflows towards the end of the decade.
FDI Inflows began to stabilize and grow again in Pakistan by 2000. During the
foreign direct investment was able to thrive. In his memoir, In the Line of Fire, Pervez
Deregulation, fiscal incentives, and liberal remittance of profits and capital were core
47
Bambaci, Juliana et al. Built to Last: Two Decades of Wisdom on Emerging Markets Allocations. MSCI Applied
Research, 2012. Accessed February 2016. https://www.msci.com/resources/pdfs/built_to_last.pdf, p8.
48
Musharraf, Pervez. 2006. In the Line of Fire: A Memoir. New York: Free Press.
36
tenets of the nation’s investment policy.49 The privatization of enterprises was fully
protected which meant that the government legally could not nationalize or expropriate
reduce red tape, rationalized utility charges, and improved infrastructure. Expenditure on
health and education grew, creating a progressive economic environment that was
attractive to foreign investors. These policies diminished distortions within the market,
increased the efficiency of exchange, and reduced levels of perceived risk and uncertainty
regarding the sudden alteration of economic policies. FDI net inflows increased sharply
within the earlier half of the decade, increasing from US$ 534 million in 2003 to peaking
While the level of growth experienced within Pakistan during this time was
impressive, it is important to note that the nation’s FDI levels lagged behind the rest of
the developing world. In 2007 capital inflows to Pakistan were 4% of GDP while average
49
Atique, Zeshan, Mohsin Hasnain Ahmad, Usman Azhar, and Aliya H. Khan. 2004. “The Impact of FDI on Economic
Growth Under Foreign Trade Regimes: A Case Study of Pakistan [with Comments]”. The Pakistan Development
Review 43 (4). Pakistan Institute of Development Economics, Islamabad: 707–18.
http://www.jstor.org/stable/41261022.
37
capital inflows to other developing countries were 7.5% of GDP.50 It has been argued that
the reasons for this difference stem from an unstable political environment, inadequate
infrastructure, and high levels of security risk, concerns that were not as present in other
developing and emerging markets. Even though the Pakistani economy was growing
rapidly, the country was still in its early stages of development, and thus more vulnerable
to domestic and external shocks as compared to its regional counterparts. Hence, the
2008, the Pakistani economy moved from rapid rates of growth to a state of crisis. Real
GDP growth slowed sharply and foreign exchange reserves plunged. Heightened security
concerns consumed the newly elected fractious and fragile democratic government’s
more attention. Low investment in human capital, shortage of energy, and rising security
concerns challenged the nation’s capacity to attract foreign investors. The global financial
crash of 2008 induced further stress on the domestic economy as Pakistani exporters
struggled to sell their goods to the nation’s largest export market, the United States.
Deteriorating diplomatic relations and failure by the Pakistani government to service the
nation’s debt increased uncertainty over future returns, discouraging foreign firms to
50
Zeb, Nayyra et. al. P. 33
51
Atique, Zeshan et al., p.20
52
Standard and Poor’s Emerging Markets Core Index serves as an alternative for investors seeking more balanced
country and sector weightings and less exposure to developed market economies.
38
Today, the Pakistani government is acutely aware of the need to boost Pakistan’s
2013 the Board of Investment (BOI) published a report discussing their strategy for
attracting FDI between 2013 and 2017. The report acknowledges that Pakistan is a high-
risk investment proposition. The report states that, “boosting Pakistan’s international
general and its FDI targets in particular.”54 To that end the Investment Policy of 2013,
which is outlined within the 2013-2017 BOI Strategy Report, focuses specifically on
In October 2014 the Board of Investment hosted a two-day conference for foreign
companies registered with the department to discuss this policy. The Board introduced
several additional incentives for foreign investors including 100% tax credit for five years
on new industries established by June 30th 2016, as well as credit for investment in
the China-Pakistan Economic Corridor (CPEC), a mega bilateral project that aims to
China, has allowed foreign investment within Pakistan to increase again, especially in the
moderate growth in FDI inflows to the country since 2013. Positive economic growth
trends have refocused attention on opportunities existent within Pakistan, allowing for
FDI inflows to advance development efforts within the country. The next section of this
53
Board of Investment. Foreign Direct Investment Strategy 2013 – 17. Accessed March 2016.
http://boi.gov.pk/UploadedDocs/Downloads/InvestmentStrategy.pdf
54
Ibid, p.9
55
KPMG. 2015. Pakistan – Gearing Up to Attract Foreign Investment.
https://home.kpmg.com/xx/en/home/insights/2015/02/pakistan-gearing-up-attract-foreign.html
39
chapter discusses the importance of FDI within Pakistan, and presents reasons for why
the country has latent potential to serve as an attractive host country for FDI.
FDI has served as one of the main sources of foreign capital inflows to Pakistan
since the 1960’s along with international aid, and is considered an important vehicle for
economic growth within the country.56 The Pakistani government’s desire to attract high
levels of FDI inflows has resulted in the creation of the most liberal foreign investment
frameworks in South Asia, allowing foreign investors to own up to 100% of their equity,
repatriate a 100% of profits, and receive numerous tax holidays such as a 100% tax credit
Pakistan has one of the highest consumption-to-GDP ratios in the region, driven
by a rapidly urbanizing population. With more than 180 million citizens, and the age
demographic skewed towards the youth, there is great capacity for growth within sectors
Technology.58 Foreign investors can benefit from the trend of youth entrepreneurship in
Pakistan which can potentially induce a paradigm shift in the economy.59 Pakistan’s
location as a shipping hub, neighboring two BRIC economies—China and India, as well
as Iran, a fast growing economy, provides foreign investors with opportunities for
56
Arshad Khan, Muhammad. Foreign Direct Investment and Economic Growth: The Role of Domestic Financial
Sector. P. 3; 21
57
KPMG. Investment in Pakistan. 2013. Accessed October 2015. P.9
https://www.kpmg.com/PK/en/IssuesAndInsights/ArticlesPublications/Documents/Investment-in-Pakistan2013.pdf
58
Ibid
59
Ibid
40
regional trade. Pakistan’s strengthening relationship with China is encouraging the most
significant incline in FDI inflows to the Pakistan since the early 2000’s.
However, several factors deter foreign investors from investing in Pakistan. These
include internal concerns such as government inefficacy and security concerns, and
external considerations such as changes in global economic trends, each of which are
variables this paper employs to analyze FDI trends across sectors within Pakistan.
One of the key hindrances to Pakistan’s growth story is its low investment-to-
GDP ratio. The ratio stood at 13.5% in 2014, one of the lowest in the world.60 As a result
the government has been unable to develop infrastructure, resulting in limited provision
of facilities such as energy, water, or consistently paved roads. Additionally following the
decision to participate in the War on Terror, Pakistan has been perceived as a nation with
poor national security. These limitations along with poor government efficacy and
political instability have resulted in FDI moving away from Pakistan and towards those
proposition. The next section of this chapter provides an overview of events occurring
during the last fifteen years that drastically changed domestic conditions. Understanding
the events that contributed to deteriorating political and economic conditions within
Pakistan allows for an accurate understanding of why the nation has found it difficult to
60
Government of Pakistan, Ministry of Finance. Pakistan Economic Survey. 2013-14. Accessed December 2015.
http://finance.gov.pk/survey_1314.html
41
3.3 The Last Fifteen Years: Internal and External Shocks to the
Pakistani Economy
Since 2000 Pakistan has witnessed drastic changes in the amount of inflows it has
received. This section provides an account of major internal and external events
occurring during the last fifteen years that have affected FDI inflows within the country.
2000 – 2004:
During the first half of the decade, Pakistan moved away from a stable military
regime presided by Pervez Musharraf, to one that was rapidly weakening due to growing
demands for democracy. Pakistan nominally returned to civilian rule in late November
2002 with the creation of Musharraf’s “democratic” party, the Pakistan Muslim League -
Quaid-e-Azam (PML-Q), although Musharraf still retained massive powers including the
ability to dismiss the elected parliament. In 2002 PML-Q formed a coalition government
with a majority of one vote, attempting to combine democracy with military rule, and
At the same time, however, economic performance remained strong. The country
recorded an estimated 4.7% current account surplus in 2002.62 According to the Federal
Bureau of Reserves exports grew by more than 16% between July and December of
2002, reaching a value of USD 4.71 billion.63 By 2004 the IMF commended Pakistan,
stating that a host of structural reforms had been implemented and the debt situation had
improved.64 Further, they suggested that while external support had been beneficial the
61
Economist Intelligence Unit, Pakistan Country Reports. November 2002
62
Ibid, June 2003
63
Ibid
64
Ibid, August 2004
42
improvement primarily reflected a government-led change of policy implementation and
Indicators improved marginally during this time. The IMF asserted their concerns about
public expenditure management and the slow pace of reform in sectors such as power
generation. These issues aggravated conditions in Pakistan post-2008 when the country
witnessed a rapid decline in political stability, coinciding with deep economic shocks and
growing security concerns that resulted in a decline in FDI inflows to the country.66
2005 – 2009:
foreign and domestic private investment grew within this time period. Government
effectiveness increased marginally between 2005 and 2006, as measured by the World
Governance Indicators. The economy continued to expand until 2007, and Pakistan
experienced a peak in FDI inflows, resulting in the investment growth rate to reach nearly
20%.67 The government continued to focus on private sector expansion as a tool for
economic growth and development. Measures incentivizing FDI included reforms in the
65
Ibid, December 2004
66
Ibid, December 2004
67
Ibid
68
Ibid, September 2007
43
However, Pakistan’s sustainability and competitiveness as an international player
was limited due to vested national political interests, and weakening military rule that
was giving away to an even weaker democratic setup. In 2007, rising international oil
economic growth and development within Pakistan stopped abruptly by the end of 2007
and early 2008, when the country was faced with simultaneous internal and external
shocks. The global financial crash of 2008 resulted in a significant loss of FDI, as global
investment levels declined. The political system was in shambles as Pervez Musharraf
of Supreme Court judges in November 2007 furthered his unpopularity, fueled calls for
Benazir Bhutto, returned past Prime Minister and leader of the opposition, deepened the
political crisis, and raised concerns regarding national security provision in Pakistan.
end of 2007 and early 2008 had a strong, negative effect on FDI inflows. While most
South Asian countries were able to attract FDI between two to three years of the global
growth, which had been the main driver of economic growth, fell from 20% a year to
6.9% a year by the beginning of 2008. The sharp increases in political and operational
risk in recent months no longer allowed the liberalized economy to present itself as an
opportunity that was independent of the political situation within the country.69
69
Ibid, January 2008 and July 2008
44
By November 2008 Asif Ali Zardari, husband of Benazir Bhutto and the new
leader of the Pakistan People’s Party (PPP), was elected President of the country. During
reluctance to rely on the IMF, the government turned to the organization for assistance in
November 2008. By accepting IMF financing, the Pakistani government lost an extensive
public expenditure.
By July 2009 the Pakistani army had launched a large-scale offensive against the
Tehrik-e-Taliban Pakistan (TTP) in the North West Frontier Province (since renamed
Tribal Areas (FATA).70 The War on Terror required Pakistan to increase its military
budget, and raised concerns regarding security provision in the country. 71 The
simultaneous security and economic crisis added to the concerns of a divided and weak
general population. Given the poor international economic climate, foreign investors
were not prepared to invest in Pakistan at a time when political stability was weak,
government effectiveness was low, and security provision was in decline. Thus, Pakistan
continued to experience a decline in FDI inflows through the end of the decade.
70
Ibid, July 2009
71
Ibid, November 2009 and December 2009
45
2010 – 2014:
By 2010, the Economist Intelligence Unit predicted a meager 1.5% annual rate of
investment growth in Pakistan. Remittances were now the main driver of economic
which resulted in the death of more than 2,000 people only exacerbated the situation.
rescue, rehabilitation and crisis management efforts. Pakistan continued to remain heavily
dependent on multilateral institutions and bilateral donors for concessional loans and
Government effectiveness as ranked by the Economist Intelligence Unit and the World
Bank’s World Governance Indicators stayed low, and growing pressures on Zardari’s
government meant that political stability remained a dim possibility. The capture of
Osama Bin Laden in 2011 by U.S. Special Forces refocused negative attention on
Pakistan. Questions regarding the capacity and will of the Pakistani government to
combat terrorism raised security concerns and contributed to a further withdrawal of FDI.
making, shortages of energy and water, ongoing security concerns, and low investment in
human capital. 74 Tighter domestic credit markets and a continued lack of foreign
72
Ibid, November 2010
73
Ibid, August 2010
74
Ibid, April 2012
46
Following the national elections of 2013, many speculated the possibility of an
upswing in domestic circumstances. Nawaz Sharif (PML-N) was elected Prime Minister
in June 2013.75 His priorities to curb the domestic energy crisis and control terrorism
fared well for the possibility of political stability. In 2014 FDI inflows recorded modest
growth. However, due to constant power outages, poor basic infrastructure, and weak
security conditions, Pakistan has been unable to take full advantage of international
economic stability and opportunity. It is likely that the USD 46 billion CPEC trade deal
will allow for development in power and infrastructure. China’s involvement in Pakistan
will help promote economic links between Pakistan’s Gwadar port and China’s Xinjiang
province.76 Such a partnership is likely to help boost the economy and promote foreign
FDI inflows to Pakistan grew rapidly between 2000 and 2007 (Figure 4).
Attracting USD 308 million in 2000, FDI inflows peaked at USD 5.29 billion in 2007.77
Soon thereafter inflows began to decline, dropping to USD 5.4 billion in 2008 and to US
75
This was Nawaz Sharif’s third time in office. He had previously been Prime Minister for two incomplete terms in the
1990’s.
76
Ibid, June 2015
77
World Development Indicators. Foreign Direct Investment, net inflows (BOP, current US$). World Bank. Accessed
October 2015. http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD
47
national security. and diminishing levels of global investment caused a significant
Between 2000 and 2014, FDI inflows to the Energy, Telecommunications and
Financial Services Sector accounted for an average of 68% of total FDI inflows to the
country.78 Trends in FDI inflows within these three sectors as compared with national
FDI trends during this time period, however, have varied. Inflows to the Energy Sector
have remained almost entirely consistent between 2005 and 2015, only increasing slightly
between 2006 and 2008 (Figure 4). FDI inflows to the Telecommunications Sector
weakly match national FDI inflow trends between 2004 and 2009. However, the sector
has been unable to increase growth in FDI inflows since then. FDI inflows to Financial
Services are normally distributed around 2007-08, and closely match trends in national
FDI inflows. Differences in inclines and declines in FDI inflows across Energy,
78
Authors calculations of numbers from BOI data
48
Telecommunications, and Financial Services suggest that changes in political stability,
government effectiveness, security, and global investment levels have had different
effects across sectors and the economy as a whole. The next three chapters offer a
comparative sectoral analysis of FDI inflows to each of these three sectors between 2000
and 2014, and examine the ways in which government effectiveness, national security,
and global investment levels have influenced FDI inflows within each sector.
49
Chapter Four
Power and Energy
advancing long-term economic growth and development within Pakistan. Dr. Musadik
Mailk, special assistant to Prime Minister Nawaz Sharif, maintains that the energy crisis
is a result of three major issues: the wide gap between supply and demand, the high cost
of power, and “inefficiencies” within the system, a code word for electricity theft across
the country.79 The National Electric Power Regulatory Authority (NEPRA) has estimated
that repeated breakdowns and shortfalls of power have resulted in a 2-3% reduction in the
GDP of the country. 80 Given high capital costs, it is unlikely that the Pakistani
government will be able to restructure the sector independently. Therefore, there is a need
to integrate the private energy sector as part of a broader sectoral reform framework.81
Writers such as Michael Kugelman82, Javed Akbar83, and Afia Malik84 have stressed the
79
Malik, Musadik. Pakistan’s Energy Crisis: Challenges, Principles, and Strategies. Published in Kugelman, Michael,
ed. 2015. Pakistan’s Interminable Energy Crisis: Is There Any Way Out? P. 25 Accessed December 2015.
https://www.wilsoncenter.org/sites/default/files/ASIA_150521_Pakistan's%20Interminable%20Energy%20Crisis%20r
pt_0629.pdf
80
Government of Pakistan Ministry of Finance, Pakistan Economic Survey 2014-15. Islamabad, Pakistan, 2015. P. 243.
Accessed January 2016. http://www.finance.gov.pk/survey_1415.html
81
Fraser M., Julia. 2005. Lessons from the Independent Private Power Experience in Pakistan: The World Bank, The
Energy and Mining Sector Board. P. 12. Accessed February 2016.
http://info.worldbank.org/etools/docs/library/240338/Lessons%20from%20the%20Independent%20Private%20Power
%20Experience%20in%20Pakistan.pdf
82
Michael Kugelman is a Senior Associate for South Asia at the Woodrow Wilson Center for International Scholars
83
Javed Akbar is the Chief Executive of Javed Akbar Associates (Private) Limited, a consulting company that
specializes in energy analysis and forecasting
84
Afia Malik is a Senior Research Economist at the Pakistan Institute of Development Economics
50
importance of private sector involvement, particularly foreign private sector involvement,
in the restructuring and advancement of Pakistan’s energy sector. However, poor policy
investors, and a precarious security situation has discouraged foreign investors from
investing in Pakistan’s energy sector. According to the United States Institute of Peace,
almost all foreign companies that financed generation projects in the 1990’s had sold off
This chapter analyzes the effects of government effectiveness, security, and global
FDI inflows on inflows of FDI to the Energy Sector in Pakistan. It argues that the foreign
private sector has been deterred from investing in Pakistan’s energy sector due to weak
government efficacy and growing security risks. The first section of this chapter provides
an overview of energy production and distribution systems within Pakistan, and discusses
the role of the foreign private sector within the industry. The following sections discuss
the effect of each of the three independent variables on FDI inflows to the energy sector.
The chapter concludes with a comparative analysis of the implications each of the
meager 60 mega-watts (MW). By the mid-1960’s the nation’s generation capacity had
85
Aziz, Rashid and Munawar Baseer Ahmad. 2015. Pakistan's Power Crisis: The Way Forward. Washington, DC:
United States Institute of Peace. P. 5
86
An Overview of Electricity Sector in Pakistan. Islamabad: Islamabad Chamber of Commerce and Industry. Chp. 1.1
51
population demanded growth within the sector. During the 1980’s the government began
introducing reforms to attract foreign investment inflows to the energy sector. 87 These
reforms were unable to attract a significant response and demand continued to increase
well into the early 1990's, causing frequent and massive blackouts throughout the decade.
As a response to the growing gap in supply versus demand for energy, the government
created the 1994 Power Policy, which introduced a series of incentives and returns on
investment for private foreign investors interested in Pakistan’s energy sector. The most
important of these incentives was that the Pakistani government guaranteed itself as a
buyer of the power supplied by the private sector. By signing exclusive Power Purchase
the private investor agreed on a rate at which units of energy would be sold to the
government. The Agreements also guaranteed investors a return on equity for the power
plant. Additionally, the price at which energy was bought was dollar-indexed which
meant that the private investor was protected against fluctuations in the Pakistani rupee.88
investment in Pakistan’s energy sector, the Pakistani government aimed reduced the risk
and uncertainty associated with investing in the energy sector for foreign investors.
A Private Power and Infrastructure Board (PPIB) was set up in 1994 to oversee
the implementation of this policy. In 1997, NEPRA was formed to oversee transparency
and regulation in the Energy sector. NEPRA’s main responsibilities were to, “issue
licenses for generation, transmission, and distribution of electric power; establish and
enforce standards to ensure quality and safety of operation and supply of electric power
87
Annual Report, 2004-05, National Electric Power Regulatory Authority (NEPRA)
88
Majid Munir in discussion with the author, February 2016.
52
to consumers; approve investment and power acquisition programs of the utility
companies; and determine tariffs for generation, transmission and distribution of electric
power.”89
approximately 7.5%.90 Demand for electricity grew by 3-4% annually until 2004.91 In
order to keep up with demand, high investments in the energy sector were required,
placing pressuring the Pakistani government to deliver results quickly. During this time,
Pakistan’s power sector comprised of four main power producers: 1) Water and Power
(IPPs).92 Of the four producers, WAPDA and PAEC were publically owned companies.
Policy changes and attempts at regulation played a pivotal role in enabling the
establishment of several private plants during the growth years in Pakistan.93 To meet
demand, the government increased its reliance on private energy producers. By 2005
there were twenty-one IPPs operating in Pakistan, a marked increase since 1994, when
there were fifteen.94 Additionally KESC, a publicly owned company, was privatized in
November 2005 when multiple Pakistani and foreign businesses purchased a 71% stake
in the company.95
89
Asian Development Bank, Private Sector Assessment: Pakistan. December 2008. P. 31.
90
Annual Report, 2004-05, National Electric Power Regulatory Authority (NEPRA). Calculations by author.
91
Malik, Afia. 2012. Power Crisis in Pakistan: A Crisis in Governance? PIDE Monograph Series. Islamabad: Pakistan
Institute of Development Economics
92
IPPs (International Power Producers) are private entities that own facilities to generate electric power that is sold to
the Pakistani government.
93
The years between 2000 and 2005 are understood as being the growth years of the Pakistani economy.
94
Annual Report 2004-05, NEPRA; An Overview of Electricity Sector in Pakistan.
95
A full list of investors is available on K-Electric’s website: http://www.ke.com.pk/investor/company
profile/index.html
Since privatization, the Pakistani government has retained a minimum 27% in KESC—since renamed K-Electric—to
serve as, “a measure of comfort to the prospective buyer of the utility.” K-Electric is a vertically integrated private
company responsible for the generation, transmission, and distribution of electric power in its area, which includes the
53
Since privatization, K-Electric’s financial and operational performance has
improved. In the first five years post-privatization, the company increased generation
capacity and fuel efficiency by 39%, and reduced transmission and distribution losses
from 36% to 28%.96 K-Electric's net losses decreased from PKR 15.5 billion in 2009, to
PKR 14.6 billion in 2010.97 By 2012, the company reported a profit of 2.6 billion rupees.
Saad Hasan, a writer at the Express Tribune, a Pakistani English daily, wrote: “The
power utility has come a long way since it was privatized in 2005. From a company beset
by rampant theft, [a] network of rickety power lines and corruption [when it was
Pakistan.”98 The company has been able to incorporate additional private investment
within its structure by contracting engineering companies such as Siemens (German) and
Descon (Pakistani). These opportunities have influenced the increase in FDI inflows to
the Energy sector since the end of 2005 (Figure 4), and provide the basis for Pakistani
economists and researchers to conclude that Pakistani investment needs in the energy
Since 2005-06, growth in FDI inflows to Pakistan’s energy sector has remained
nearly consistent, increasing marginally between 2006 and 2009, but declining again in
2010 (Figure 4). Increases in FDI inflows to the energy sector between 2000 and 2014
did not directly correspond with the introduction of policy incentives offered by the
city of Karachi, and certain areas in the province of Balochistan. K-Electric serviced approximately 80 billion Pakistani
rupees of debt with the Pakistani government in exchange for equity in the company, and arranged for public entities to
pay their outstanding dues. (Annual Report 2005-06, NEPRA. P. 5; Annual Report, 2014-15, NEPRA. P. 22, 139)
96
Akbar, Javed. Addressing the Present Energy Crisis by Avoiding Mistakes of the Past. Published in Kugelman,
Michael, ed. 2015. P. 12
97
Asian Development Bank, Private Sector Assessment: Pakistan
98
Hasan, Saad. Turnaround: The Story Behind K-Electric’s Rs12b in Profits. The Express Tribune, September 26,
2014. Accessed March 2016. http://tribune.com.pk/story/767390/turnaround-the-story-behind-k-electrics-rs12b-in-
profits/
99
Malik, Afia. 2012. Power Crisis in Pakistan: A Crisis in Governance? P. 24
54
government, which suggests that policy incentives were not the primary factors
motivating or deterring foreign investors from investing in Pakistan’s energy sector. Dr.
Ashfaque Khan argues that increased incentives were ineffective due to poor long-term
planning by the Pakistani government, weak oversight, and high sunk costs of capital,
which increased the risk of investing in the sector.100 The government’s inability to
perform on promises made in the 1994 Power Policy by providing adequate liquidity to
foreign investors created a number of fiscal, financial and transparency related issues for
Issues of weak government oversight and rising security risks have presented
themselves in different capacities throughout the last fifteen years. The next three
sections of this chapter discuss the ways in which governance, security, and global
investment trends have affected FDI inflows to the energy sector between 2000 and 2014.
The Pakistani government is the sole buyer of power sold by private producers
within the country. As part of the 1994 Power Plan, the government and private
producers sign Power Purchase Agreements at the time when the private investor invests
in the energy sector. The Agreement outlines the rate at which the government will buy
energy from the private producer. Given the wide gap between demand and supply of
energy in Pakistan, and the government’s inability to reduce this gap, the Energy sector is
very much a seller’s market. The government therefore buys electricity at the value
100
Dr. Khan is a Professor of Economics at the National University of Sciences and Technology (NUST) in Islamabad,
Pakistan
Khan H., Ashfaque and Yun-Hwan Kim. 1999. Foreign Direct Investment in Pakistan: Policy Issues and Operational
Implications.: Asian Development Bank, Economics and Development Resource Center. P. 28-29. Accessed January
2016. http://www.adb.org/sites/default/files/publication/28178/er066.pdf
55
provided by the power producer, which makes the per-unit cost of private energy more
the government subsidizes electricity for its consumers—the Pakistani public, and is
“circular debt,” a problem that is substantially limiting the country’s ability to attract
In their 2014 Investment Strategy, Arif Habib Limited stated: “Energy availability
in Pakistan has been declining over the last few years, as a result of low investment in the
sector. … Despite several measures taken by the government, prolonged and frequent
power cuts have affected production activities and kept economic growth under [a] stiff
grip from reaching its full potential.”102 Afia Malik has argued that the problem of
circular debt could have been curbed right from the onset if cost effective electricity
tariffs for consumers had been introduced early. She maintains that such a policy measure
by the government would have suppressed the exponentially rising and thus
unmanageable growth in domestic demand, and would have also been able to attract and
maintain investment levels in the future. 103 The Pakistani government’s lack of
professional and long-term management has increased levels of market and performance
risks associated with investing in the energy in Pakistan for foreign investors, and has
101
The government’s inability to provide remuneration in time causes private producers to face a liquidity crunch,
which disables them from being able to forward payments to oil and diesel refineries. In return, oil and diesel refineries
are unable to make payments to distributors, resulting in the creation of a vicious cycle of debt creation.
102
Arif Habib Limited. 2014. Pakistan Strategy 2014: 2014 Unfolds another Chapter of a Growth Story! P. 18.
Accessed November 2015. http://investorguide360.com/wp-content/uploads/2014/01/AHL-Research1.pdf
103
Malik, Afia. 2012. Power Crisis in Pakistan: A Crisis in Governance? P. 4
104
An Overview of Electricity Sector in Pakistan. Islamabad: Islamabad Chamber of Commerce and Industry, Chp. 2.2.
56
However, when studying the correlation between government effectiveness and
inflows of FDI in the Energy Sector between 2000 and 2014, a negative relationship is
observed (Figure 5). FDI inflows seem to increase when government efficacy declines.
One would expect that higher levels of government efficacy would correlate with
higher levels of FDI inflows to the sector. However, several reasons might contribute to
the opposite conclusion. Taimour Noorani argues that foreign investors have a greater
He argues that limited government efficacy creates opportunities for foreign investors to
monetize from regulatory loopholes within a system that is corrupt and lacks cohesive
checks and balances.106 Private producers inflate expenses incurred in setting up a power
plant in order to state a higher per unit cost of energy in their Power Purchase
105
Interview with Taimour Noorani (Senior Analyst for Principal Investments in Bank Al-Falah’s Merchant Banking
Group) in discussion with the author, March 2016
106
Ibid
57
Agreements. Due to limited resources, and sometimes vested interests, the government is
often unable or unwilling to measure the true cost of energy provided by private power
producers, allowing foreign investors to advantage from inefficacies within the system.
Pakistan. The first threat includes attacks in the mountainous and mostly rural areas of
the country such as KP, North Waziristan, and the largely ungoverned territories of
FATA. The second threat to security comes from attacks occurring in populated city
centers. In either case, power production has historically remained unaffected since
power production plants and distribution centers generally do not tend to be located in or
near either of these sites. They are usually constructed in the outskirts of towns and cities.
The security threat therefore, did not directly affect production or distribution
patterns in the energy sector prior to 2008. As observed in Figure 6, FDI inflows to the
energy sector continued to grow until 2008, even as the security situation in Pakistan
worsened. Thus, on average, the relationship between security and FDI inflows is
positive, which suggests that lower levels of security provision correlate with higher
58
Figure 6: Correlation between Security and FDI Inflows to Pakistan’s
Energy Sector; Author’s calculations
However, since 2009, the relationship has changed. The graph indicates that FDI
inflows to the energy sector have begun to decline as security conditions worsen in
Pakistan. It is likely that such a trend has started to emerge in recent years due to two
reasons: One, it is possible that foreign investors have wanted to exit the market since
before 2009 due to deteriorating security conditions, but were unable to do so due to the
time needed to close or sell power plant investments. Two, security limitations have
started to affect the energy sector more directly in recent years, as militants are beginning
to attack power plants within the country in an attempt to disrupt the provision of power
to the Pakistani population. In 2013, at least seven people were killed in an attack by
107
Pakistan Attack: Deadly Raid on Peshawar Power Plant. BBC News, April 2, 2013. Accessed March 2016.
http://www.bbc.com/news/world-asia-21999352
59
resulted in nearly 80% of the country facing a power blackout.108 Deteriorating security
conditions in Pakistan have now started to affect power production and distribution
directly, adding to the foreign investor’s risk considerations. As a result, foreign investors
are likely to be deterred from investing Pakistan’s energy sector due to growing security
In their 2013 Investment Report, KPMG, a Dutch financial services firm with an
office in Pakistan wrote: “[The GoP] is providing an investment friendly environment for
the oil and gas sector to attract local and foreign investment. As a result…this sector has
inflows of FDI to the energy sector. As global inflows of FDI increase, there is a
corresponding increase in FDI inflows to the energy sector in Pakistan. Such a trend
investment proposition.110 Foreign investors are more willing to absorb risk when the
were highest between 2006 and 2008, when global inflows of FDI were high as well. In
2006, the government signed agreements worth USD 42 million with international
companies to carry out exploration activities in the oil and gas sectors. Pipeline projects
108
Baloch, Shehzad. Attack on power lines in Balochistan causes national blackout. The Express Tribune, January 25,
2015. Accessed March 2016. http://tribune.com.pk/story/827139/parts-of-punjab-sindh-balochistan-left-without-power-
after-guddu-transmission-line-trips/
109
KMPG. 2013. Investment in Pakistan. P. 28. Accessed October 2015.
http://www.kpmg.com/PK/en/IssuesAndInsights/ArticlesPublications/Documents/Investment-in-Pakistan2013.pdf
110
Majid Munir in discussion with the author, February 2016
60
were discussed and negotiated with several countries including Qatar, Turkmenistan, and
Iran.111 These projects were long-term contracts that has allowed for the maintenance of
stability in energy sector inflows even after national FDI inflows crashed.
of total generation capacity, an increase from 30% in 2011.112 The USD 47 billion CPEC
trade deal has put energy provision at the center of the government's agenda. The energy
sector is arguably at a point where it has both, the need and the opportunity to transform.
Creating a sustainable partnership with the private sector will allow the government to
111
Annual Report 2005-06, NEPRA. P. 5
112
Rizvi, Jawwad. Demystifying Pakistan’s Energy Crisis. 2015. Accessed March 2016.
http://www.technologyreview.pk/demystifying-pakistans-energy-crisis/; An Overview of Electricity Sector in Pakistan.
Islamabad: Islamabad Chamber of Commerce and Industry
61
4.5 Assessing the Impact of Government Effectiveness, Security, and
Global Investment Trends on FDI Inflows to the Energy Sector
[of power]," Michael Kugelman argues. 113 Multiple factors have contributed to the
current energy crisis in Pakistan. According to the United States Institute for Peace, there
are three primary shortages affecting Pakistan’s energy sector: 1) Physical shortage:
supply has not managed to keep pace with demand; 2) Financial Shortage: below cost
tariffs and expensive subsidies have not been able to cover the cost of supply, resulting in
repeated annual deficits; 3) Governance: government owned utilities and institutions have
provision and service.114 Ineffective governance has created budgetary problems such as
circular debt, limiting the power sector’s capacity to expand especially. The issue was
exacerbated after 2008, when foreign investors were faced with limited liquidity options,
Since 2008, growing security concerns have increased the risk associated with
security provision has increased the risk associated with investing in Pakistan, and
deterred significant growth in FDI inflows since 2008. As a result, Pakistan’s energy
Pakistan’s energy sector requires large capital outlays, and is thus more affected
by a slowdown in investments.115 United States Institute for Peace concludes that the
62
necessary to expand and maintain power generation, preventing the energy sector from
developing new, cheaper, and more efficient production patterns.116 Afia Malik argues
that in addition to building capital stock for power generation, investments must also
focus on increasing capacity for electricity transmission and distribution to overcome the
At its core, FDI inflows to Pakistan’s energy sector are diluted due to inefficient
the capacity to produce electricity on its own, but without streamlining the existing
system, and accounting for commitments made to private investors, the government will
116
Aziz, Rashid and Munawar Baseer Ahmad. 2015. Pakistan's Power Crisis: The Way Forward. P. 2
117
Malik, Afia. 2012. Power Crisis in Pakistan: A Crisis in Governance? PIDE Monograph Series. Islamabad: Pakistan
Institute of Development Economics. P. 23
118
Arif Habib Limited. 2014. Pakistan Strategy 2014: 2014 Unfolds another Chapter of a Growth Story! P. 18
63
Chapter Five
Telecommunications
infrastructure and services such as cellular towers, help centers and data centers is an
Since 2000, the telecommunications sector has been one of the fastest growing
sectors in the Pakistani economy. Between 2001 and 2015, the sector has attracted USD
7.2 billion in foreign direct investment. With a consumer base of over 121.13 million cell
phone subscribers, 2.2 million broadband subscribers, and 30 million Internet users, the
sector is ripe with opportunity for foreign investors. 121 In their Investment Strategy
Report, KMPG wrote of Pakistan as becoming the “destination of choice” for several
offshore.122
119
Ahmad, Fahad et al. Telecommunication Sector: Its Role, Contribution to FBR Revenue, Problems and Issues.
Abstract. Directorate General of Training and Research, (IR) Lahore. Accessed January 2016.
http://www.dgtrdt.gov.pk/Research/37th_synndicate_%20rports/6.pdf
120
Mahmood Pannu, Qaisar. 2010. Factors Influencing FDI in the Pakistan Telecom Sector. Masters of Business
Administration, School of Management Blekinge Institute of Technology. P. 45. Accessed February 2016.
http://www.diva-portal.se/smash/get/diva2:830980/FULLTEXT01.pdf
121
IT & Telecom Sector Overview. Prime Minister's Office Board of Investment, accessed December,
2015, http://boi.gov.pk/Sector/SectorDetail.aspx?sid=5.
122
KMPG. 2013. Investment in Pakistan. P. 23
64
However, FDI inflows to Pakistan’s telecommunications sector have declined
significantly since 2008. This chapter studies the variations in inflows of FDI between
2000 and 2014, analyzing the role of government efficiency, national security, and global
chapter argues that the decline in government effectiveness and in security conditions
viable investment destination for foreign investors. Section One of this chapter provides
companies has shifted from the government to the sector. Sections two, three and four
discuss the influence of government efficacy, national security, and global investment
trends on inflows of FDI to the telecommunications sector. The final section of this
chapter analyses the impact that each of these variables is likely to have on the ability of
In 1947, the Post and Telegraph Department was all that existed of the
Telecommunications sector. In 1962, the Department was separated into two distinct
units: Pakistan Post Office Department and the Pakistan Telephone and Telegraph
Department. The separation was motivated by the availability of new and cheaper
(PTC). The PTC took over the functions and operations of its predecessor. The same
65
year, the Pakistan Telecommunications Corporation Act was signed. This Act illustrated
government announced its intention to privatize the PTC. 123 By 1996 the PTC was
Limited (PTCL) listed on the Karachi Stock Exchange. The restructuring was part of the
telecommunications sector, and was responsible for creating “a fair regulatory regime to
promote investment, encourage competition, protect consumer interest and ensure high
quality Information and Communication Technology (ICT) services.” 124 The PTA
and changes required within the telecommunication sector, and implemented any policies
In July 2003, the PTA announced the Deregulation Policy, which further open the
telecommunications sector for local and foreign investors to provide better services at
competitive prices.125 In 2004 the PTA introduced the Mobile Cellular Policy, liberalizing
the cellular services sector in order to attract foreign investors as well.126 By March 2006,
the Pakistani government had sold 26% of PTCL’s shares and transferred management
123
Ahmad, Fahad et al. Telecommunication Sector: Its Role, Contribution to FBR Revenue, Problems and Issues. P. 8
124
Mahmood Pannu, Qaisar. 2010. Factors Influencing FDI in the Pakistan Telecom Sector. P. 46
125
Ibid. P. 63
126
Ibid. P. 72-73
66
control to Etisalat—a U.A.E. based company. The privatization of PTCL effectively
1.94 billion, the highest annual inflow of FDI the sector has ever received (Figure 4).
The exponential growth in FDI inflows to the telecommunications sector shortly after the
introduction of the 2003 Deregulation Policy suggests that foreign investors were at least
the number of telephone connections for every hundred individuals living within an area,
grew from 6.25 in 2003 to 44.06 in 2006 (Figure 8). 127 Nearly seven million new
connections were added on average in every quarter during the fiscal year 2006-07.
Given the favorable investment climate that emerged in 2003 due to a liberalized
foreign investment regime and high market growth potential, the telecommunications
sector attracted several foreign investments. Between 2006 and 2007, three deals were
127
PTA figures
67
signed: First, Orascom Telecom, an Egyptian company with 88% stake in Mobilink, the
largest cellular operator of Pakistan, acquired the remaining 11% stake in Mobilink from
a local investor for USD 290 million.128 Second, Warid Telecomm, a U.A.E. based
company, finalized a deal with Singtel, which acquired a 30% stake in Warid Telecom
for USD 758 million.129 Third, CM-PAK of China Mobile injected USD 700 million in
rural areas. This deal was part of a larger USD 2 billion investment plan for the next three
and have not been able to recover since (Figure 4). The decline in inflows of FDI to the
telecommunications sector mirrors the decline in FDI inflows to the Pakistani economy.
According to the Ministry of Finance in Pakistan, the Pakistani economy faced a series of
unexpected and severe shocks during 2008-09. Negative shock came from severe
macroeconomic crises that cause several policy-induced imbalances, reducing the amount
still surprising, especially given that teledensity grew consistently until 2013, indicating
the continued presence of strong growth opportunities (Figure 8). The fact that
telecommunications was unable to recover FDI inflows after the global crash of 2008,
suggests that growth was not exclusively limited by a decline in international investment
128
Inam, Asif. 2007. Foreign Direct Investment in Pakistan's Telecommunications Sector: Pakistan Telecommunication
Authority. P. 23. Accessed January 2016. https://www.itu.int/ITU-D/finance/work-cost-tariffs/events/tariff-
seminars/Korea-07/presentations/FDI_Aasif_Inam.pdf
129
Ibid. P. 23
130
Ibid. P. 24
131
Hameed, Sadika. 2014. Opportunities in the Development of Pakistan's Private Sector: Center for Strategic and
International Studies. P. 79. Accessed October 2015.
http://csis.org/files/publication/140917_Hameed_PakistanPrivateSector_Web.pdf
68
levels. The following sections of this chapter examine the effects of government efficacy,
study: the sector is almost entirely privatized and de-regulated, but is still monitored by
the PTA. Following the 2003 Deregulation Policy, the PTA has been responsible for
investors are allowed to own a 100% of equity, offered an initial depreciation allowance
of 50% of plant, machinery and equipment cost, and charged only 0-5% percent customs
determine pricing structures. This allows investors to price products in a way that allows
them to cover costs and compete with other companies in the sector. Unlike the complex
tariff structure existent in the Pakistani Energy sector, independent pricing generates low
political pressures and has well mapped risk and risk mitigation strategies, creating a
132
Harianawala, Shabbir and Owais Aziz. Pakistan Telecom Sector Overview. Haidermota BNR. Accessed February
2016. http://www.hmcobnr.com/includes/Telecom%20Sector%20Overview.pdf
69
Higher levels of government efficacy correlate with higher levels of FDI inflows. The
graph also presents the cluster of years between 2009 and 2014 in the bottom left hand
corner, which indicates that the lowest levels of FDI inflows to the telecommunications
sector were experienced when government effectiveness was also at its lowest.
of a government that has paid little attention to encouraging foreign investors to invest in
cellular data service options. Such delays have weakened the quality of policy
increased the perceived level of risk and uncertainty associated with investing in the
telecommunications sector.133
133
3G is the third generation of mobile telecommunications technology. This is based on a set of standards used for
mobile devices and mobile telecommunications use services and networks that comply with the International Mobile
Telecommunications-2000 specifications by the International Telecommunication Union
70
Additionally, even though the telecommunications sector offers one of the most
liberalized investment policies, tax rates within the sector are some of the highest in the
34%.134 The Pakistani government has also increased tax rates for consumers. In 2014,
cellular subscribers were paying 19.5% GST, 15% withholding tax, and up to 8% of
affects low-income communities that are no longer able to afford services that cellular
growth opportunities available to the sector in Pakistan. Thus as the risks associated with
government effectiveness have increased, the incentives offered to foreign investors have
The first time that the provision of security and the provision of
telecommunication services were in conflict with each other was in 2004, when a bomb
disposal squad found mobile phone technology used to detonate a bomb in Karachi.136
Since then mobile phone controlled devices have often been used to detonate bombs
134
Pomerleau, Kyle. 2014. Corporate Income Tax Rates Around the World, 2014: Tax Foundation. Accessed March
2016. http://taxfoundation.org/sites/default/files/docs/FF436_0.pdf
135
GST: Goods and services tax; Baloch, Farooq. Budget 2014-15: Giving Relief to the Telecom Sector. The Express
Tribune, June 3, 2014. Accessed March 2016. http://tribune.com.pk/story/716958/budget-2013-14-giving-relief-to-the-
telecom-sector/
136
Khan, Faraz. Ban on cellular service: Police fear terrorists may use other means besides cellphones. The Express
Tribune, November 22, 2012. Accessed March 2016. http://tribune.com.pk/story/469406/ban-on-cellular-service-
police-fear-terrorists-may-use-other-means-besides-cellphones/; accessed april 1 2016
71
during processions and political rallies. Cellular phones were used again in 2010 to
detonate bombs during processions held on the 8th, 9th and 10th of Muharram.137 While
cases of shutting down cellular services were heard of as early as 2005 when cellular
service in certain areas of Balochistan was restricted due to ongoing military operations,
the government has started applying this strategy in most parts of the country, and at a
wide range of events including religious or national holidays, protests, and marches.138 A
report published by the Institute for Human Rights and Business in 2015 writes:
The increased frequency in cellular service shut downs has made it challenging
affecting the work environment, and are influencing the decline in FDI inflows to the
137
Ibid.
Muharram is the first month of the Muslim Calendar. It is mostly observed by Shia’a Muslims who mourn the
martyrdom of Imam Hussain, grandson of the Prophet Muhammad in the Battle of Karbala. Imam Hussain was
martyred on the 10th of Muharram.
138
Purdon, Lucy (ed.). Security v. Access: The Impact of Mobile Network Shutdowns. Institute for Human Rights and
Business. P. 17. Accessed April 1, 2016. https://content.bytesforall.pk/sites/default/files/2015-09-Telenor-Pakistan-
Case-Study.pdf
139
Ibid. P. 5.
140
Ibid.
72
Figure 10: Correlation between Security and FDI Inflows to
Pakistan’s Telecommunication Sector; Author’s calculations
security provision affected the telecommunications. The National Action Plan required
the PTA to plan, implement, and monitor the biometric re-verification of cellular SIM
cards.141 While this drive has created a reliable and necessary database, it has caused a
drop in teledensity for the first time since 2000. Teledensity dropped to 61.8% at the end
of fiscal year 2015, from 79.6% in 2014. Further, the rollout of 3G and 4G cellular data
services received less attention due to total priority being placed on the re-verification
drive. Thus far, the provision of national security has been incompatible with the interests
141
In 2014, the Pakistani government launched a campaign requiring all cellular SIM cards—microchips that store the
cellular phone’s number—to be re-registered under the owner’s name. The owner’s biometrics (fingerprints) were also
taken, re-verified, and then matched to the cellular number. This information was then tallied and synced against the
individual’s National Identity Card. While all new cellular numbers are verified through this process, older phones still
needed to be checked. Numbers that could not be matched or identified against the owner’s information were
disconnected. The motivation behind this strategy was to control deteriorating security conditions, limit the ease with
which terrorists could access a cellular phone and number, and allow the government, army and intelligence units to
trace numbers to suspects of terrorist activities.
According to the 2014 Investment Report by Arif Habib Bank, a total of 215.4 million cellular SIM cards were re-
verified under this drive, out of which 114.9 million cellular SIM cards were identified as belonging to their rightful
owners, while 98.3 million cellular SIM cards—including 26.7 million active cellular SIM cards—were blocked
because ownership was inaccurately listed, or could not be verified. (Arif Habib Limited. 2014. Pakistan Strategy
2014: 2014 Unfolds another Chapter of a Growth Story! P. 9)
73
of the telecommunications sector in Pakistan, and has increased the uncertainty
associated with investing in the sector. The consequences of providing higher levels of
security have resulted in the deterrence of FDI inflows to the telecommunications sector
in Pakistan.
an increase in levels of FDI to the sector. Immediate increases in inflows of FDI were
observed following the implementation of the 2003 Deregulation Policy. The policy was
created at a time that global inflows of FDI were rising. Until 2007, the relationship
between global investment levels and inflows of FDI to the telecommunications sector
remained positive, illustrating that higher levels of global investment correlated with
74
It is possible that the telecommunications sector received higher levels of FDI
inflows between 2000 and 2007 due to rising global investment. However, in the years
between 2009 and 2014, global investment has remained high, while inflows of FDI to
telecommunications have declined. Since 2010, the telecommunications sector has been
telecommunications sector are moving away from the country at a time when there is a
favorable international climate for attracting FDI inflows. Such a trend suggests that the
decline in government effectiveness and the growing cost of security measures has
closer cooperation with foreign businesses and countries. Such an effort might allow for
the telecommunications sector to re-attract more inflows of FDI in the upcoming years,
making the sector a competitive and attractive investment opportunity once again.
At the end of fiscal year 2014-2015, there were five major market players
partially owned by a foreign investor.143 As a result growth in FDI inflows directly affects
142
Purdon, Lucy (ed.). Security v. Access: The Impact of Mobile Network Shutdowns. P. 17
143
Moblink (29.2% market share), Telenor (27.5% market share), CMPak (19.3% market share), Ufone (15.5% market
share) and Warid (8.6%). (PTA Report 2014 – 15)
75
Between 2000 and 2014, the Pakistani telecommunications sector has experienced
drastic changes in the levels of inflows of FDI. This inconsistency has partially been
caused due to weakening government efficacy, which has led to a decline in policy
enforcement, and the creation a highly exploitative tax regime. Increased government
Action Plan have disrupted the capacity of companies operating within the
effectiveness, and a decline in national security have contributed to outflows of FDI from
Today, while most urban areas are almost entirely connected to a grid, there are
several rural areas that remain untouched. In order to access capital and technology
for the government to develop partnerships with foreign companies in order to boost FDI
inflows to the telecom sector. In doing so, the government also opens up the possibilities
expansion of branchless mobile banking services such as Easy Paisa which allow for
families in rural areas to access capital far more easily within their own communities.
The telecommunications sector has been able to benefit significantly from foreign
direct investment, be that through access to capital, development of human capital, and
opportunity, and continuing to develop that opportunity will not only be instrumental for
the growth of the sector, but also for the growth of the Pakistani economy at large.
76
Chapter Six
Financial Services
In an essay published in 2005 Dr. Ishrat Husain, former governor of the SBP
wrote: “No economy can grow and improve the living standards of its population in the
absence of a well functioning and efficient financial sector.”144 He argued that economic
attracting FDI. 145 A strong financial system provides a more conducive investment
climate in two ways: First it mobilizes savings, which increases the amount of resources
lowering acquisition costs and increasing the efficiency of on-going projects.146 The
development of the Pakistani economy and its capacity to attract long-term and
sustainable sources of FDI. Stability within the financial sector reduces the risk involved
144
Husain, Ishrat. Banking Sector Reforms in Pakistan. Blue Chip – The Business People’s Magazine. January 2005.
Accessed April 1, 2016. http://www.bis.org/review/r050203e.pdf
145
Arshad Khan, Muhammad. Foreign Direct Investment and Economic Growth: The Role of the Domestic Financial
Sector. PIDE Working Papers. Islamabad: Pakistan Institute of Development Economics. P. 24. Accessed November
2016. http://130.56.61.71/sites/default/files/documents/PIDE_Khan_2007_05.pdf
146
Ibid. P. 14
77
in financial transactions, lowers the cost of financial intermediation, and optimizes the
Pakistan’s financial system determines the ease with which firms are able to borrow and
Since the privatization of major domestic banks in Pakistan during the 1990’s, the
financial services sector has expanded in size and become more competitive.149 Relatively
improved management as compared to the 1970’s has increased profitability and reduced
the number of non-performing loans.150 Yet opportunities within the field remain largely
unexploited. In 2014 only 13% of Pakistan’s adult population had individual or shared
financial services is an indicator of the lack of development in financial services and the
This chapter argues that weak government effectiveness and poor security
Pakistan. The first section provides an overview of the financial services sector in
Pakistan. The next three sections discuss the effects of government efficacy, security and
global inflows of FDI on inflows of financial services in Pakistan respectively. The final
section of this chapter discusses the role that the Pakistani government can play in the
future in order to improve and encourage FDI inflows to the financial services sector in
Pakistan.
147
State Bank of Pakistan. 2005. Pakistan Financial Sector Assessment: Chapter 8 (Financial Sector Development). P.
145. Accessed February 2016. http://www.sbp.org.pk/publications/FSA/2005/
148
Arshad Khan, Muhammad. Foreign Direct Investment and Economic Growth: The Role of the Domestic Financial
Sector. P. 30
149
Banks had been nationalized in the 1970’s
150
State Bank of Pakistan. 2009. Pakistan 10 Year Strategy Paper for Banking Sector Reforms. P. 3. Accessed March
2016. http://www.sbp.org.pk/bsd/10YearStrategyPaper.pdf
151
World Bank. Financial Inclusion Data/Global Findex. Accessed April 2016.
http://datatopics.worldbank.org/financialinclusion/country/pakistan
78
6.1 An Overview of the Financial Services Sector in Pakistan
Prior to the early 1970’s the financial sector in Pakistan comprised of a mixture of
public and private banks. In the early 1970’s Zulfiqar Ali Bhutto, then Prime Minister of
nationalized and the role of public sector development finance institutions was
sector in Pakistan.153 However, by the end of the 1980’s it became apparent that the
policies. Assessing the financial sector that existed towards the end of the 1980s, the
By the early 1990’s a number of amendments were made to the State Bank of
Pakistan Act of 1956 and the Banks (Nationalization) Act of 1974.155 The objective was
services by allowing the private sector to establish new banks, increase autonomy of the
SBP in formulating and implementing monetary policy, and consolidate the role of the
SBP as a regulator of banks and non-bank financial institutions.156 In 1991 the private
152
State Bank of Pakistan. 2000. Financial Sector Assessment 1990-2000: Executive Summary. P. 1. Accessed March
2016. http://www.sbp.org.pk/publications/fsa/
153
Ahmad, Usman, Shujaat Farooq, and Hafiz Hanzla Jalil. 2009. Efficiency Dynamics and Financial Reforms: Case
Study of Pakistani Banks. International Research Journal of Finance and Economics (25): 173-181. P. 173.
154
State Bank of Pakistan. 2000. Financial Sector Assessment 1990-2000: Executive Summary
155
State Bank of Pakistan. 2000. Financial Sector Assessment 1990-2000: Chapter 2 (Financial Sector Reforms During
1990s). P. 3.
156
Ibid.
79
ownership of banks was permitted. The government liberalized investment policies in
order to attract foreign and domestic private sector investors towards Pakistan’s financial
services sector. Ten new private banks were authorized to operate in 1991. Market share
of private domestic and foreign banks increased from 7% in 1990 to 44% in 2000.157
to foreign investors investing in the financial services sector. The State Bank of Pakistan
(SBP) only required foreign investors to register all FDI inflows with the bank.
Otherwise, foreign investors were free to repatriate profits and dividends, and dis-invest
from the country at any point without prior approval from the SBP.158
Institutions. Domestic private banks held approximately 78% of total assets of the
banking system, while public sector and foreign banks held a 20% and 2% share in total
assets respectively.159 FDI inflows to the financial services sector have closely matched
national FDI inflow trends. Inflows remain minimal until 2005-06, after which they rise
sharply for the next two years (Figure 4). Inflows of FDI to the financial services sector
surpass those going to the telecommunications sector in 2007-08. However, the financial
services sector was unable to revitalize inflows of FDI after 2008. The next three sections
of this chapter assess the ways in which government effectiveness, security, and global
investment levels have affected FDI inflows to the financial services sector. In doing so,
157
Burki, Abid A. and Niazi, G.S.K. Impact of Financial Reforms on Efficiency of State-Owned, Private and Foreign
Banks in Pakistan. Center for Management and Economic Research Working Paper Series. Lahore: Lahore University
of Management Sciences. P. 3. Accessed February 2016.
http://130.56.61.71/sites/default/files/documents/LUMS_Burki_2006.pdf
158
Financial Services Sector Overview. Prime Minister's Office Board of Investment. Accessed December, 2015,
http://boi.gov.pk/Sector/SectorDetail.aspx?sid=9 BOI financial services sector
159
Ibid
80
this section studies the causes behind weak inflows to the financial services sector pre-
Until the end of the 1980’s, public sector financial institutions held the bulk of
assets, deposits, and investments of Pakistan’s financial sector. 160 High government
borrowing, bank-by-bank credit ceilings, interest rate controls, and subsidized credit
structure was not conducive for meeting the growing financial needs of the economy.
financial services sector in the 1990’s. Private banks were allowed to operate and
compete with publicly owned commercial banks. These reforms were focused towards
attracting FDI into the economy. 162 By the end of 1991, the International Finance
Corporation ranked Pakistan as one of the leading emerging markets in the world.163
sector. The Administration chose to not keep banks under government ownership and
control, and decided to privatize and consolidate them instead. The government injected
30.7 billion rupees into the financial services sector to offset the losses incurred by
160
State Bank of Pakistan. 2000. Financial Sector Assessment 1990-2000: Chapter 1 (Pre-Reform Structure in 1990)
161
Ibid.
162
Ejaz Ali Khan, Rana and Qazi Muhammad Adnan Hye. 2014. Foreign Direct Investment and Liberalization Policies
in Pakistan: An Empirical Analysis. Cogent Economics and Finance (2): 1-12. Accessed February 2016.
http://www.tandfonline.com/doi/pdf/10.1080/23322039.2014.944667
Foreign direct investment and liberalization policies in Pakistan: An empirical analysisp. 9
163
State Bank of Pakistan. 2000. Financial Sector Assessment 1990-2000: Chapter 1 (Pre-Reform Structure in 1990). P.
7-8
81
nationalized commercial banks and to recapitalize them.164 Such an initiative helped to
increase trust in government effectiveness and boost investor confidence in the financial
were appointed as Chief Executives, while experienced and reputable businessmen were
invited to join the Board of Directors. Shaukat Aziz, Minister of Finance from October
1999 till November 2007, was appointed as Prime Minister as well in 2004. According to
Majid Munir, Mr. Aziz was “the right man doing the right job.” 165 A professional
economist and financer, Mr. Aziz understood the nuances of the Pakistani economy. His
efforts to maintain cordial and friendly relationships with major trading and investor
countries allowed for Pakistan to be seen in a positive light within the international
financial services sector, the government created a positive investment climate attractive
to foreign investors.
The system quickly unraveled after 2008, when Asif Zardari was elected president
of Pakistan. At this time the weakened global economic climate demanded an effective
effective governance and direction at a time of economic despair resulted in the departure
of several foreign banks form Pakistan. HSBC, ABN-AMRO, and the Royal Bank of
Scotland all closed up operations between 2008 and 2013.166 Foreign banks that stayed
reduced operations: The American owned Citibank downsized from fifteen branches in
164
Husain, Ishrat. Banking Sector Reforms in Pakistan
165
Majid Munir in discussion with the author, February 2016
166
HSBC sells Pakistan arm. The Telegraph. September 10, 2012. Accessed April 2016.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9533856/HSBC-sells-Pakistan-arm.html; RBS to
sell off its Pakistan bank. BBC News. Accessed April 2016. http://www.bbc.com/news/10133868
82
Pakistan, to three branches only, between 2008 and 2010.167 Credit Suisse, a Swiss bank
closed operations in Pakistan after 2008, even though they still had an active operating
license.168
jobs and income generated through the informal economy resulted in a lot of economic
activity being hidden from the analysis regarding Pakistan’s market potential. The
inability of the Pakistani government to transfer operations of the informal economy into
This perception deterred FDI inflows to the financial services sector in Pakistan.169
83
Between 2000 and 2014, financial services in Pakistan has benefitted from higher
higher inflows of FDI to the financial services sector. This intuition aligns with the
relationship observed in Figure 12: higher levels of FDI to the financial services sector in
There are two main clusters of years in the bottom half of Figure 10. The one on
the right includes years from 2002 till 2005, while the cluster on the left includes years
from 2008-2014. Both clusters have similar levels of inflows of FDI to the financial
services sector. However, governance is far more effective between 2000 and 2005, as
compared to 2008 till 2014. This discrepancy suggests that while government efficacy is
exclusively contributing to inclines and declines of FDI inflows to the sector either.
Karachi is the financial and commercial hub of Pakistan. It is also a city that has
been experiencing high levels of security crises such as terrorist attacks and grave
political instability. The assassination of Benazir Bhutto in December 2007 was carried
out on Shahre-Faisal, the financial vein of the city. The concentration of financial
services in a highly insecure city has deterred foreign investors from investing in
Pakistan.170 According to the Economic Survey of Pakistan, the economic loss due to
incidents of terrorism is USD 106.98 billion. Annual economic losses started to increase
170
Pratima Singh (Senior Analyst at Frontier Strategy Group) in discussion with the author, January 2016
84
Limited security provision has most directly started to affect small and medium
size enterprises (SMEs) in Pakistan. The poor security situation has resulted in the
repeated closure of small businesses due to “unexpected holidays” that are announced by
the government due to bomb blasts, strikes organized by political parties, and riots. The
inability of small businesses to generate adequate revenue directly affects their capacity
to service debt. 171 Given that SMEs constitute nearly 90% of all enterprises in Pakistan,
their inability to perform due to security concerns significantly affects economic growth
prospects in Pakistan.172 These concerns are factored into the analysis of foreign financial
institutions that would much rather invest in a lower risk investment opportunity.
However, the data on the relationship between security and FDI inflows to the
financials sector is fairly ambiguous (Figure 13). A weak positive relationship between
171
Alam, Kazim. PMN Survey: Poor security dampens microfinance industry. January 11, 2015. Accessed April 2016.
http://tribune.com.pk/story/820207/pmn-survey-poor-security-dampens-microfinance-industry/
172
Small and Medium Enterprises Development Authority. State of SMEs in Pakistan. Accessed April 2016.
http://www.smeda.org/index.php?option=com_content&view=article&id=7:state-of-smes-in-pakistan&catid=15
85
security and inflows of FDI to the financial services sector exists, which indicates that
FDI to the financial services sector in Pakistan has been low when security provision has
been weak within the country. However, the correlation has become more significant
since 2009. The cluster of years in the bottom right of Figure 13 indicates that lower
levels of security provision have strongly correlated with low levels of FDI in the
financial services sector between 2009 and 2014. The trend suggests that security risks
have likely become more of a concern for foreign investors since 2008, and have deterred
economies.173 These include market size, level of real income and possibilities for the
such as power shortages that lead to an underutilization of industrial capacity, rising costs
of production, circular debt, and trends in the decline in FDI, reinforce the perception that
In many ways, the financial services sector serves as a mediator and facilitator of
FDI inflows being injected into the rest of the economy. Trends in the national economy
serve as a magnified mirror for trends observed in the financial services sector. Higher
levels of FDI inflows to Pakistan indicate correspondingly high levels of FDI inflows to
the financial services sector. As a result, factors limiting inflows of FDI to the national
173
Ejaz Ali Khan, Rana and Qazi Muhammad Adnan Hye. 2014. Foreign Direct Investment and Liberalization Policies
in Pakistan: An Empirical Analysis. P. 4.
174
Taimour Noorani in discussion with author, March 2016
86
economy, such as poor government efficacy and weak security provision will invariably
Figure 14a: Correlation between Global Inflows of FDI Figure 14b: Correlation between Global Inflows of FDI
and FDI Inflows to Pakistan; Author’s calculations and FDI Inflows to Pakistan’s Financial Services Sector;
Author’s calculations
The relationship is observed in Figure 14a and 14b. The relationship between
global inflows of FDI to Pakistan, and global inflows of FDI to Pakistan’s financial
services sector is almost entirely the same. Thus, in order to understand the factors
limiting inflows of FDI to the financial services sector in periods of economic growth, it
is necessary to understand the factors restricting inflows of FDI to the Pakistani economy
at large. This thesis has argued that weakening government efficacy and declining
security provision has increased the risk associated with investing in Pakistan. Poor
governance and security is therefore going to deter foreign investors away from
87
6.5 Assessing the Impact of Government Effectiveness, Security, and
Global Investment Trends on FDI Inflows to the Energy Sector
Financial markets affect both the financing of investment and day-to-day business
output, encouraging a positive feedback effect on FDI inflows to the financial services
domestic security, and crash of the international financial system contributed to the sharp
decline in inflows of FDI to Pakistan, and thus, to Pakistan’s financial services sector.
If the Pakistani government is to boost national FDI inflows, it must work towards
strengthening the nation’s financial services sector in order to boost Pakistan’s image as a
viable destination for foreign investors. There is a need for effective leadership in the
State Bank of Pakistan that can increase the ease with which foreign investors can invest
in Pakistan. The government must also focus on expanding the role of the formal
economy, and increase security provisions, particularly in Karachi. If they are to increase
FDI inflows to Pakistan, the Pakistani government must reduce risk and uncertainty
perceptions regarding the investment climate in Pakistan. Working towards this goal by
strengthening the country’s financial services sector allows for the country to
175
Arshad Khan, Muhammad. Foreign Direct Investment and Economic Growth: The Role of the Domestic Financial
Sector.
88
Chapter Seven
Conclusion
Foreign Direct Investment has become an integral part of the effort to create an
open international economic system, and is considered a key provider of capital and
the foreign private sector, allows developing economies to stimulate economic growth
Since the 1990’s, several developing countries have liberalized their economies in
amounts of FDI.176 The Pakistani experience, however, has been different. In spite of
offering one of the most liberal foreign investment regimes in Asia, Pakistan has been
unable to attract or maintain substantial inflows of FDI since 2008. Motivated by this
puzzle, this thesis examined and assessed the internal and external factors affecting the
inclines and declines in FDI inflows to Pakistan between 2000 and 2014. Undertaking a
effectiveness, national security, and global investment trends on FDI inflows to three
sectors in Pakistan: Energy, Telecommunications and Financial Services. This study has
argued that declining government effectiveness and poor national security provision has
176
Khan H., Ashfaque and Yun-Hwan Kim. 1999. Foreign Direct Investment in Pakistan: Policy Issues and
Operational Implications, p. 33
89
investing in Pakistan. This thesis has demonstrated that Pakistan’s capacity to attract
desirable levels of FDI inflows was diminished after 2008. Foreign investors were more
models that have existed since the 1950’s. By examining the evolving role of government
and the private sector in international development efforts, this thesis discussed the
growing importance of finding a sustainable partnership between these two actors in the
post-2015 development agenda. Having established the need for cooperation between the
public and private sector, this thesis discussed the particular role of FDI as a provider of
development finance and a driver of economic growth and development. The study then
introduced Pakistan as an important case study, and offered an overview of the country’s
relationship with FDI since the 1970’s. The historical analysis reviewed the Pakistani
government’s stance regarding private sector involvement in the domestic economy, and
discussed the ways in which economic policies have evolved from widespread
nationalization towards liberalization and privatization. This study argued that the active
effort by the Pakistani government to encourage FDI inflows in the 1990’s was indicative
of the nation’s realization of FDI’s role as a driver of economic growth and development.
Having established the reasons behind the Pakistani government’s pursuit of economic
liberalization, the study examined the factors affecting limited inflows of FDI to the
country since 2008. By analyzing the trends in FDI inflows to the Energy,
Telecommunications, and Financial Services sectors between 2000 and 2014, this study
discussed the ways in which government efficacy, national security, and global inflows of
90
FDI promoted or limited the provision of an environment conducive to foreign investors
in Pakistan. Each of the sectors had different relationships with the three independent
variables, which indicated that the extent to which FDI inflows were affected by
government efficacy, security, and global investment was unique to each sector.
This research has established that the liberalization of Pakistan’s FDI regime has
not served as an adequate or sufficient strategy for attracting higher inflows of FDI in the
country. Between 2000 and 2014, FDI inflows to Pakistan were extremely variable,
involvement, it will need to offer more consistent policies to foreign investors, and focus
offering attractive policies, the Pakistani government must also focus on altering
perceptions that foreign investors hold regarding the risk associated with investing in
viable and opportune host country by providing more effective policy enforcement
security.179
The Pakistani government must also work towards revising, introducing and
implementing policies particular to each sector. In the case of the Energy sector in
Pakistan, the government must revisit the tariff and subsidy framework, and restructure
current pricing strategies in order to reduce the costs associated with private power
177
Interview with Shaista Khilji (Professor of Human and Organizational Learning at the George Washington
University’s Graduate School of Education and Human Development) in discussion with the author, March 2016
178
Ibid; Majid Munir in discussion with the author, February 2016
179
Khan H., Ashfaque and Yun-Hwan Kim. 1999. Foreign Direct Investment in Pakistan: Policy Issues and Operational
Implications
91
production in the country. There is also a need to improve power generation and
government must identify ways to partner with private companies regarding issues
pertaining to national security provision, and reexamine the tax structure currently
investment destination, thus incentivizing foreign banks to continue operations within the
country. Within each of the sectors, the Pakistani government must consistently work
towards developing long-term partnerships with foreign investors that align with the
vision of the Post-2015 Development agenda, and further economic growth and
It can be argued that the Pakistani government has started to move in this
recognizes the limitations and risks associated with investing in Pakistan. The Report
destination country for FDI. Additionally, the signing of the USD 46 billion CPEC trade
deal between China and Pakistan will increase infrastructure facilities available in the
technological capacity, reduce the gap between investment and savings, and contribute to
This research serves as an important first step in understanding the factors that
have affected FDI inflows to Pakistan, and across sectors within the country. This paper
92
has demonstrated that ineffective governance and declining national security contribute to
capacity in encouraging and maintain FDI growth will be crucial to the development of
the domestic economy. The government will need to closely consider the types of FDI
inflows being drawn to the country, and carefully assess how inflows affect domestic
collaborative effort between the public and private sectors. The role of the Pakistani
continue to be crucial.
180
Shaista Khilji in discussion with the author, March 2016
93
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